Texas Taxing and Budgeting

 

Texas has the third largest state budget in the nation (only California and NY have larger).

            --each budget is created for a biennium (2-year period)

            --each budget gets larger each biennium

Decline in state spending (per capita) over the last six years (adjusted for inflation and population increases)

 

Revenues

 

Most revenue from state taxes and from federal funds (approximately 80% of state money per year comes from these two sources combined, with taxes totaling nearly 50% of state revenue, and federal grants slightly over 30%)

 

Taxation:

            National taxes—income tax since 1913 (16^th amendment)

                        --approx. 60% of federal tax receipts from income taxes

                        --most of the rest of federal tax receipts from SS and Medicare payroll tax

            State taxes—

                        --property taxes (less important since the Great Depression, but until about 1961, the single-most important source of revenue for the state); today state property taxes in Texas have been banned by the Texas Constitution, and only counties, cities, and special districts may assess and collect property taxes

                        --sales taxes (adopted in 1930s for some items, general sales tax adopted in 1961; today is 6.25%, one of the highest in the nation); source of approx. 57.7% of 2005 state tax revenue

                                    --general sales taxes (broadly based taxes on most items’ retail prices)

                                    --selective sales taxes (or “excise taxes” or “hidden taxes”) (levied on sale, manufacture or use of specific items such as cigarettes, alcohol, gasoline, motor vehicles, hotel rooms, etc., and often hidden in the price of the product itself-we’re unaware that we’re paying taxes)

                                    --gross-receipts taxes (taxes on total gross revenue of certain enterprises such as utilities and insurance companies)

                                    --severance taxes (taxes on production of oil and natural gas)

                        --NO state income tax in Texas (only 6 other states without income taxes, only 3 other states without a corporate income tax)

                        --as a % of personal income, state taxes in Texas collect only about 5%

                                    --% personal income in taxes in Texas has been declining.

            Local taxes—much of the burden for government services is placed on local governments within the states => higher local tax burden than in most other states

                        --unfunded mandates from the state to local governments (esp. school districts) => higher local taxes; property owners bear more of a burden than non-property owners.

                        --property taxes are levied ad valorem (according to value), primarily on real property (land and buildings), but in some places also on personal property (e.g., furniture, cars, etc.)

                                    --central county appraisal authority assesses property values for all local taxing authorities within the county

                                    --local governments will set the tax rate (which in most cases is capped by state constitution or statute)

                        --city sales taxes (1% attached to the same goods as the state general sales taxes; cities in counties with over 500,000 people may add an additional 1% sales tax for economic development, thus in most places within the state, total sales taxes are at 8.25% for all sales taxable goods.)

                        --other miscellaneous taxes, user fees, and federal grants-in-aid

 

Issues in Taxation:

            “Any evaluation of taxes must be based on the way particular taxes affect various groups in society.”

            Types of taxes—increase or decrease in tax rate may or may not change the total revenue receipts, especially if people cut back on purchases of taxed items

                        --tax bases may be undermined if taxes are too high and discourage too much of the taxed activity.  Revenue can be raised only if taxes are at a reasonable rate.

                        --broad-based taxes are better revenue raisers than selective tax bases

                        --deciding what to tax is in effect deciding who to tax—most people are fine with higher taxes if it is not they who are paying them

 

            Regulatory Taxes—socio-economic control over isolated individual choices (“sin taxes” on liquor, tobacco, gambling, etc.).  Rarely if ever radically reduce the activity or consumption of the taxed products.  Makes the more morally astute happy that there are even minor changes in behaviour.

 

            Benefits Received Taxes—those who pay taxes benefit from the services they fund (e.g. gasoline taxes pay for highway construction and maintenance) Theoretically, those who do not pay these taxes will not benefit from the services funded by them. ----------However, there are blurry lines as to who actually benefits.  The person who purchases produce at the local market and never drives still benefits from the state highway system, because the purchased goods have been transported along the highways. The lady who never drives a car benefits from the highways if she has to be taken to and from the local senior center or hospital.  The society benefits from students’ fees at colleges and universities or from property-tax payers in local school districts, as students enter the world better prepared to work and offer needed services.

            --Provision of a public service is meant to make that service available to everyone.  (schools, criminal justice, highways, public safety, public health clinics, etc.)

 

            Ability-To-Pay Taxes—property, sales, and income taxes. Ideally, those who own more, purchase more or make more will have more means to pay higher taxes

                        **Sales taxes are REGRESSIVE—the impoverished pay out the most in sales taxes as a total percentage of their income, because they cannot afford to save and invest their money. They have to purchase the basic goods needed for survival, and nearly all retail goods are subject to state taxation. 

 

            Tax Rates—Average American works for approximately 1/3 of the year just to pay tax bills to all levels of the government. 

                        --Progressive Tax Rates—(as with the income tax): increase as the tax bases increases. Those who make more pay more, a larger percentage of their personal income, in taxes.

                        --Texas Constitution prohibits state income tax without voter approval; even if voter approval is received, those revenues generated will only be used for education and property tax relief.

                        --Regressive Tax Rates—(as with the state general sales tax, property taxes, excise taxes): rates decline as the base increases.  Those with higher incomes will pay a lower  percentage of their personal income in taxes per year than those with lower incomes

                        --Tax shifting: businesses pass on their tax burdens to the consumers in the forms of higher costs; nearly 1/3-1/2 of all corporate income taxes are passed on to consumers as hidden taxes

 

Other Revenues:

            Intergovernmental transfers—mostly from federal government in the form of grants in aid. 

                        --Depression Era brought about a shift in the level of government responsible for social services. 

                        --Federal income tax => change in the financial relationship between state and national governments

                        --most of the health and human services projects as well as a good percentage of transportation infrastructure costs are funded by federal grants

                                    --categorical grants (specific purposes mandated by the government, e.g., Medicaid; states must meet minimum federal requirements)

                                    --block grants (general purposes, e.g., job training or education; more flexibility for states and local governments to determine exactly how money is spent)

 

            Borrowing—Texas is limited in its ability to borrow funds by constitutional restrictions

                        --Comptroller projects revenues to legislature—appropriations can be no more than what is taken in without raising taxes due to Texas’ balanced budget

                        --4/5 of legislature may vote to borrow in emergency situations

                        --bonds may be issued for some programs

 

BUDGETARY PROCESS:

            Legislature and the governor’s office both prepare a budget, separately.

                        --some cooperation between the two offices, but Legislative Budget Board usually receives the most attention during the session.

                        --budgets are sent to the appropriate legislative committees, then appropriations are made to authorize spending (House Appropriations Committee and Senate Finance Committee)

                                    --these legislative committees are targets for special interests and for administrative agencies, each competing for a piece of the state revenue pie

                                    --Legislative Budget Board’s recommendations usually receive primacy over the governor’s due to the influence of the presiding officers on its proposals.

                                    --Governor has line-item veto that he can use to threaten appropriations that he believes are inappropriate or unnecessary – puts him in a better bargaining position with the legislature, than he otherwise would be

            -- Competition between government programs and economic interests of various sorts—receive funding not always on the basis of merit, but sometimes on the basis of political favoritism.

                        --little time during the legislative session to devote to critical scrutiny of appropriations proposals for older programs (these rarely have to face justifying themselves and their expenditures to the legislature and are almost automatically funded)

                                    --incremental budgeting—budget requests for agencies are based upon previous biennium’s budget, with increases allowed for inflation and cost increases

                                    --zero-based budgeting—would assume that each agency begins with a blank slate, and new programs would receive more attention than they currently do

                        --Dedicated/Earmarked funds—tie up about 49% of state revenues to specific purposes automatically, without need for prior legislative approval

                        --about 1/6 of state budget is discretionary (unaffected by federal, state statutory or court requirements)

            --Biennial budgets make planning difficult => overfunding of some agencies and underfunding of other agencies

                        --governor and LBB may make emergency transfers of funds from one agency to another.